Last week Dollar General started soliciting "Gold" proxies (like golden tickets?) from Family Dollar shareholders in its campaign to vote down to have FDO shareholders vote down the Dollar Tree deal and accept its tender for Family Dollar. Dollar General is seeking proxies to vote against the Dollar Tree merger, against the transaction related compensation for managers, as well as against a proposal to adjourn the meeting.

Why might management's adjournment proposal be important? If it turns out that the merger vote is going against management, the ability of managers to adjourn a meeting and extend the voting gives managers more time to twist arms and convince shareholders to go their way is an extremely powerful tool. Dollar General is seeking to take that tool away by forcing the meeting - and thus the voting - to end on date certain.

Ultimately, the vote on the Dollar Tree merger agreement will be the critical point for Dollar General. No surprise then that they are putting in effort to win a proxy fight.

(i) at least a majority of the outstanding shares tender, (ii) termination of the Amended Dollar Tree merger agreement and the voting support agreements,(iii) entry into a merger agreement with Dollar General (in form and substance satisfactory to Dollar General in its reasonable discretion), including a second step 251(h) short form merger,(iv) entry into definitive tender and support agreements by certain Family Dollar shareholders,(v) approval of the transaction under Section 203,(vi) redemption of the Family Dollar Board poison pill, and (vii) approval by antitrust authorities.

All those reasonable questions that the Faily Dollar board has about the Dollar General bid are still out there. Only now, Dollar General is going straight to the shareholders and asking them to make the decision. Family Dollar does not have a staggered board so, in effect, the scheduled Family Dollar shareholder meeting that will be called this fall to vote yes/no on the Dollar Tree offer should be the referendum on the pair of transactions. Between now and then, expect quite a bit of noise on both sides as they each make their case.

Last week Family Dollar received and then rejected an offering from Dollar General opting, rather, to stick with its deal with Dollar Tree. There is, of course, litigation. The stockholders bringing suit are arguing that the FDO board violated its fiduciary duties to the corporation by agreeing to the deal with Dollar Tree and also when they rejected Dollar Genera's competitive bid. Here's the amended complaint.

So, is the board required to chase the nominally higher Dollar General offer? What do their fiduciary duties require? Remember, in QVC, which is probably the best case for laying out how board actions in the context of a sale of control will be reviewed, the Delaware Supreme Court said:

Although an enhanced scrutiny test involves a review of the reasonableness of the substantive merits of a board's actions, a court should not ignore the complexity of the directors' task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking body best equipped to make these judgments. Accordingly, a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness.

So, if the board has two reasonable alternatives and it chooses one, the court will not second guess. That leaves a lot of discretion in the hands of the board, even when we are in "Revlon mode". So, in the FDO sale, what are the board's choices? And, are they reasonable ones?

The basic outlines of Dollar General's most recent offer are as follows:

- $80 in cash; - $500 million reverse termination fee payable if the transaction is block by regulators; - a commitment to divest itself of up to 1,500 stores should the government so require.

-$74.50 in cash and stock - a 'hell or high water' provision that requires Dollar Tree to "propose ... the sale, divestiture, license, holding separate, and other disposition of ... any and all retail stores and any and all assets ... of Parent and its Subsidiaries ... " as required to secure antitrust approval.

Hmm. Not so cut and dry. On the one hand, you have an offer in hand with near on 100% certainty of closing at this point. Sure, it will face regulatory review, but the buyer has taken all that risk. On the other, you have a nominally higher bid, but a lot of the residual risk that antitrust authorities will stop or significantly hamper the deal is left on the shoulders of the FDO stockholders. Sure, the FDO stockholders get compensated for that risk through the higher price and a reverse termination fee, but is that enough? That depends on your estimates of the probabilty of antitrust authorities putting up a stink if you do the Dollar General deal. And here, reasonable people can disagree.

If people can have a reasonable disagreement about the estimate of probabilities of antitrust enforcement against a deal that has not been accepted, well, then any court reviewing the board's decision will give the board plenty of latitude.

Absent other facts, suggesting other motivations to favor Dollar Tree, the FDO board looks on solid ground. Of course, if Dollar General were to offer up a similar 'hell or high water' provision -- and why not? It says it doesn't believe there is any significant antitrust issue -- well, then that might make it difficult for the FDO board to justify its decision to go with the lower offer as reasonable.

Gauntlet thrown, this morning Family Dollar responded to Dollar General's increased offer in the only way it could (if it wants to say no):

Ed Garden, a Family Dollar director and co-founder and Chief Investment Officer at Trian Fund Management, L.P., a large shareholder of the Company, stated, “We are focused on delivering to Family Dollar shareholders the highest value with certainty, and the Dollar Tree transaction does just that. Dollar Tree has taken the antitrust risk off the table by committing to divest as many stores as necessary to obtain antitrust clearance. We remain fully committed to the Dollar Tree transaction.”

Mr. Garden continued, “Dollar General’s revised proposal, on the other hand, does not eliminate regulatory risk for Family Dollar shareholders. Dollar General has repeatedly stated that antitrust is not a risk, yet they have put forth proposals that require Family Dollar shareholders to bear the ultimate risk. Receiving a reverse breakup fee with an after-tax value of less than $3 a share does virtually nothing to compensate the Family Dollar shareholders for assuming that risk.”

It is true that Dollar General went very far to reduce the real risk of antitrust being a block to getting the deal done, but FDO apparently believes it didn't go far enough. Turns out, absent other evidence, that a determination that Dollar General's improved bid and commitment with respect to antitrust isn't enough is still completely within the purview of the Family Dollar board. They looked at the remaining antitrust risk and figured it wasn't worth the $3/share offered in the reverse break up fee. You may disagree. I may disagree. But, it's not for you or I to say. Consistent with their obligations under Revlon, it's for the FDO board to determine. Of course, it's a very close call and the motivations of the board really matter, but the FDO - by sticking to its message that antitrust risk is critical to them - is hoping to be able to either stave off a Dollar General acquisition or maneuver Dollar General into giving up yet more concessions to alleviate the antitrust risk. You may disagree with the decision, but is the decision unreasonable? Probably not.

If Dollar General isn't willing to revisit its offer, I suppose the next step for Dollar General is to head off to court to try to get an injunction to prevent FDO shareholders from voting on the Dollar Tree deal. That's a tough road to hoe, but absent going all in on antitrust or another price increase, it's probably one of the few cards left for Dollar General to play here.

Late last week Pershing Square settled is suit with Allergan over Alergan's poison pill. The settlement permits Pershing Square to put together a group of shareholders sufficient to call a special meeting without triggering the pill. Pershing Square, with 9;7% of Allergan, was worried that if it got the support of the required 25% of shareholders sufficient to call a meeting that it would trigger Allergan's poison pill with its 10% trigger. The settlement will allow Pershing Square to get the support to call the meeting with triggering the pill.

Many of the cases we study in my M&A course and in Corporations stem from the mid-1980s when the "bust-up deal" was the order of the day. It's often surprising to law students that a corporation might be "worth more dead than alive" (gratuitous reference to Other People's Money). The bust-up might well be a thing of the 1980s and not really on too many agendas these days, but that doesn't mean there aren't real candidates.

Yahoo! Inc.’s market value has doubled since Marissa Mayer took over as chief executive officer, which you might think would be cause for celebration. But more than all of those gains can be attributed to the gangbuster growth of Alibaba Group Holding Ltd. and Yahoo Japan Corp., two thriving companies that are part-owned by Yahoo. In other words, the implied market value of the rest of Yahoo has collapsed during Mayer’s tenure, and might even be negative.

Alibaba is valued at about $153 billion, according to analysts surveyed by Bloomberg News. Yahoo itself is worth about $39 billion as of this writing and this includes its ownership of about 24 percent of Alibaba. If you subtract that out you are left with a company that’s worth just a little more than $2 billion -- less than AOL Inc., Groupon Inc., or Zynga Inc.

Yahoo also has a 35 percent stake in Yahoo Japan, a publicly traded company now valued at about $32.3 billion. Subtract out Yahoo’s stake and this means that investors seem to value Yahoo’s own business at less than nothing -- not what you would expect from a profitable enterprise.

All those people, doing all that purple work...for nothing. That can't be true. There must be some value left if one were to liquidate Yahoo's positions in both Alibaba and Yahoo Japan. Of course, all that value will remain trapped. If the hostile bid were really still a viable option, one would think that Yahoo would be an obvious choice. In any event, for young lawyers and law students looking for an example of what potential bust-up targets look like, there's one.

So, rumors are flying that Charter will nominate its own slate for the Time Warner Cable board today. This is all part of the ongoing effort by Charter to get the board of Time Warner Cable to the table to negotiate a sale of the corporation. So far, TWC has said no and sat on its hands, as it's permitted to do. There is no legal requirement that a fully informed board must depart from its corporate strategy to accept an unsolicited offer, especially if the board believes it to be unwise.

TWC hasn't followed the Airgas 'just say no' route - adopt a poison pill and rely on its staggered board to hold off an unwanted suitor. It hasn't done this so far because frankly it can't. TWC doesn't have a staggered board. Its board is up for election every year. Because TWC can't rely on a staggered board to give it the time to defeat a proposal by Charter, it's vulnerable to a proxy fight. And without a staggered board, the poison pill isn't much of a defense.

And so no surprise that Charter's next move is the proxy contest. Charter is seeking to replace TWC's entire board through a proxy contest. If Charter were to win the contest, that would be a signal from TWC shareholders that they are in favor of a deal with Charter at $132.50. The new board would face no obstacle to quickly getting a friendly deal done. Of course, it's a long road between here and there. Lots of things can happen.

Some have said, well it's possible that shareholders vote out the incumbent board and the new board comes in and does an "Airgas" - that is, the new board decides not to pursue a deal with Charter. I find that scenario highly unlikely. Why? Well, when the short slate of three Air Products nominated directors entered the Airgas board room, the remaining board members were there and able to frame the questions and make all sorts of arguments why the Air Products offer was a bad idea for Airgas. Those arguments ultimately won the day when the Air Products nominated directors sided with incumbent board members.

If Charter were to succeed in its proxy contest, the board room atmosphere post-contest would be wholly different. First, the entire board would be brand new. There will be no one around the frame questions or argue against a Charter bid. If Charter learned anything from Airgas, it's probably that they have thoroughly quizzed their nominees and they are convinced that all of them think the acquisition of TWC by Charter is a good idea already. That's not to say as directors they won't seek to informed themselves before doing a deal, but where you starts affects where you end.

All this being said, I'm confident that Charter would be happier if the effect of the proxy contest were to force the incumbent board to the table to negotiate a friendly deal.

OK, Rick and Keith again - this time negotiating use restrictions in confidentiality agreements. In this video, they take up the question that tripped up the parties in Martin Marietta v Vulcan - the limits on the use of confidential information as a backdoor standstill. Is it just me, or does Keith look a little like Ben Franklin?

Marketplace has a story on the transformation of the "corporate raider" from bad guy to good guy "shareholder activist." More than anything, this is probably a sign of how much the market has changed since the 1980s and the rise of effective defenses against hostile bids.

A Montgomery County Circuit Court judge shot down an HGS shareholder’s request for a temporary restraining order to invalidate the “poison pill” the Rockville biotech enacted last month to make it a less attractive acquisition target.

The biotech was sued by shareholder Duane Howell of Baltimore, who claims its management is cheating him, other stockholders and the company itself by rejecting GlaxoSmithKline’s $2.6 billion offer in April, and then instituting the shareholder rights plan, or poison pill. ...

Judge Michael D. Mason said Thursday that HGS had properly accounted for its actions with its shareholders when it issued the poison pill May 16.

No surprise here, I suppose. The bigger surprise would have been if the Maryland judge had ignored both Delaware and Maryland law and order the pill pulled. Odd though, Bloomberg reports that the judge in this case qas concerned that only one shareholder, the litigant, was complaining:

After a hearing on Thursday, Montgomery County Circuit Court Judge Michael Mason denied Howell's request, saying only one shareholder had sued the company, according to a report by Bloomberg News.

"This is not a case where a number of disgruntled shareholders have come to court up in arms," the judge said in court, according to the report.

Even under Maryland law, the number of plaintiffs shouldn't matter to the result. Hmm.

Here's the 139 page (?!) opinion. I know, if you're like most people you have better things to do on a Spring weekend than read it, but the first few pages gives away the ending. Strine enjoined Martin Marietta from proceeding with its hostile tender offer for Vulcan after finding that when one reads the NDA together with the JDA, the two documents limit use of confidential information only to a negotiated transaction between MM and Vulcan. Strine found that MM had indeed relied on confidential evaulation material when it put together its hostile bid. Therefore, the hostile tender would be enjoined for four months.

That's a tough pill for MM, but there's a lesson here. The lesson has to do with the procedures for using and maintaining confidential evauluation materials. As we see from MM, it's hard, maybe impossible, to unring bells once they have been rung with respect to confidential information. Strine took from MM's own actions that at the time, MM believed that it could not use confidential evaluation material in putting together its hostile bid, but it did anyway. For example, there was evidence in the record that MM knew it was using confidential information (emails: "I don't think we should use this information...", board presentations, etc), but MM used it anyway.

One thing I think it suggests, if you move from a negotiated to a hostile deal, it may require an entirely clean team, including outside counsel and i-bankers for the hostile, rather than the friendly, deal. Keeping the board and c-level types from the acquirer untainted by confidential information is harder though. Board members who see a presentation with confidential evaluation material may not be able to expunge all they have seen from their minds when considering a subsequent hostile transaction.

K&L Gates has posted a nice overview of the general issues one needs to consider when negotiating non-disclosure agreements and standstills (here), inclduing the limits on their enforceability. The authors of the memo also point out the hole in the indirect protection argument that Vulcan is attempting to make in front of the Chancery Court when they advise targets not to fall for the indirect protection argument when negotiating standstills:

When negotiating a standstill, the acquiror may argue that the target company does not need a lengthy standstill because it is already indirectly protected by the confidentiality agreement providing that the proprietary information to be provided to the acquiror may only be used in connection with the currently negotiated transaction and not for any other purpose. Targets should resist such argument—the target’s board wants certainty that the acquiror cannot launch a hostile bid and does not want to get into an argument about whether the acquirer is misusing the proprietary information.

Steven Davidoff previously did a very good overview of the issues facing Martin Marietta. I just want to add something to the discussion of the current legal battle in Delaware. Wait a minute ... what's a Maryland company seeking to take over a New Jersey company doing in a Delaware court? Martin Marietta and Vulcan are now before Chancellor Strine in Delaware arguing interpretation of a nondisclosure agreement. Martin Marietta is seeking a declaratory judgment from the Chancery Court that the NDA does not preclude them from undertaking a hostile tender offer for Vulcan. Here are the complaint, the answer, as well as the NDA in question.

Central to the Martin Marietta's argument is that the NDA does not include a standstill agreement. Had the parties, Martin Marietta argues, wanted to ensure that Martin Marietta be precluded from undertaking such a transaction in the event friendly talks fell through, they could have included the provision in the NDA, but they didn't. Martin Marietta is asking the court to give it a declaratory judgment that the NDA does not preclude them from pursing a hostile offer.

On the other hand, Vulcan claims that the confidential information handed over as part of the NDA can only be used in furtherance of the friendly transaction that the parties were contemplating when they signed the agreement. By going hostile, and presumably relying on some of the confidential information and disclosing the earlier talks, Vulcan argues that Martin Marietta is in violation of the NDA. Vulcan is looking for an injunction from the Chancellor to prevent the tender offer from going forward.

Here's the critical paragraph from the NDA:

First, Mets and Yankees? And no one thinks this deal could possibly ever go hostile? Why not call it Yankees and Red Sox? C'mon! Ok, there is no question that this NDA does not include a standstill provision of any sort. It just doesn't. Now the lawyers who negotiated the NDA know how to write standstill provisions. I'd dare say that standstill provisions are probably in their NDA form contracts. For whatever reason, they decided not to include a standstill in this agreement. Why? Who knows. It really doesn't matter, does it?

Now, look at the definition of "Transaction". Vulcan is arguing that they were negotiating a friendly deal and that any use of Vulcan's confidential information for any purpose other than the friendly deal is in violation of the NDA. The NDA defines "Transaction" as "a possible business combination transaction" between Martin Marietta and Vulcan. It doesn't read a friendly merger, a negotiated transction, or the like...just a business combination. I suppose a business combination transaction can be hostile as a well as friendly. The definition of the Transaction in the NDA certainly doesn't make it obvious that the NDA was meant to only cover a friendly, negotiated transaction and no other.

Anyway, Vulcan is asking for Chancellor Strine to read the minds of the parties rather than enforce what the parties have written on paper. It seems like hard argument for Vulcan to win.

-bjmq

Update: Yes, I am aware that I passed on an opportunity to offer up the "Strine engaging in a Vulcan mind meld to figure out the intent of the parties" pun. I'll let him do that in his opinion...

David Marcus at The Deal had an interesting piece over the weekend on the role of confidentiality agreements in the context of hostile acquisitions. He focuses on confidentiality agreements in the Vulcan/Martin Marietta transaction and the Westlake/Georgia Gulf transaction. It's a good read. Marcus also offers up the following chart from Dealogic:

I'm curious as to how Dealogic defines "successful" - I suppose that a deal that starts hostile and then ends up with a negotiated transaction is considered successful. That's one way to think about it. But that does an injustice to the power of the poison pill. I doubt there are any deals on this list of US targets where a hostile bidder has been successful over the continued protests of the target board with a pill in place.

Steven Davidoff has just posted a nice case study of the Airgas decision forthcoming in the Columbia Business Law Review. Steven had a front-row view of the Airgas hostile offer and subsequent litigation. (Google Deal Prof and Airgas if you don't believe me.) In this paper, Steven revisits the class through the prism of Delaware's judges as strategic actors. The role of Delaware's judiciary is fascinating and this paper - and the Airgas episode - is an important contribution to understanding how and why Delaware's courts decide as they do. It's well worth a read.

Abstract: When is it appropriate for Delaware judges to act strategically? This case study documents and analyzes Air Products’ $5.8 billion unsuccessful, hostile offer for Airgas, reviewing the decisions made by the Delaware courts in adjudicating the most prominent takeover bid of 2010. The three court opinions in Air Products v. Airgas show how Delaware courts strategically decide cases and the effect of this decision-making on the course of Delaware corporate law and Delaware’s constituencies. The Airgas case ultimately provides a useful lesson for when, if ever, strategic considerations should influence the outcome of individual Delaware corporate law disputes.

Validus' efforts to acquire Transatlantic Holdings have taken another turn. When we last checked in on this hostile acquisition attempt, we found out that Chancellor Strine is a fan of Hillbilly Handfishin'. Oh, and the Chancellor also ruled on the appropriateness of standstill provisions in confidentiality provisions, deal protections and fiduciary outs (In re Transatlantic Holdings). It's worth reading.

Now, we have a new turn. Validus has put forward its own directors in a proxy contest. In addition to asking shareholder to vote for its three nominees adn to oust the current directors, Validus is asking for shareholders to vote on an amendment to Transatlantic's bylaws. The bylaw change would permit the shareholders to set the number of directors on the board. By doing so, it would prohibit the incumbent board from increasing the size of the board and thereby maintain control. OK, all well and good.

But, Transatlantic has filed a suit against Validus seeking a declatory ruling from the court that Validus' proposed bylaw amendment is illegal. Specifically, Transatlantic's certificate of incorporation reads:

Article Fifth, para 1: The number of directors of the Corporation shall be such as from time to time shall be fixed solely by the Board of Directors.

The Transatlantic board is arguing that only the board has the right to set the size of the board, and that an effort by shareholders to set the number of directors is contrary to the articles and thus not permisssible. In that regard, the directors have the better argument. Of course, if the incumbent board were simply to increase its size for the sole purpose of thwarting outsiders from obtaining control via a proxy contest, that would raise all sorts of Blasius-related issues. For that reason, this case is an interesting one to start to follow. Here's the complaint in the bylaw litigation.

Abstract: The forthright brand of shareholder activism hedge funds deploy emerged by the mid-2000s as a major corporate governance phenomenon. This paper explains the rise of hedge fund activism and offers predictions about future developments. The paper begins by distinguishing the “offensive” form of activism hedge funds engage in from “defensive” interventions “mainstream” institutional investors (e.g. pension funds or mutual funds) undertake. Variables influencing the prevalence of offensive shareholder activism are then identified using a heuristic device, “the market for corporate influence”. The rise of hedge funds as practitioners of offensive shareholder activism is traced by reference to the “supply” and “demand” sides of this market, with the basic chronology being that, while there were direct antecedents of hedge fund activists as far back as the 1980s, hedge funds did not move to the activism forefront until the 2000s. The paper brings matters up-to-date by discussing the impact of the recent financial crisis on hedge fund activism and draws upon the market for corporate influence heuristic to predict that activism by hedge funds is likely to remain an important element of corporate governance going forward.

Abstract: In each of the three largest economies with dispersed ownership of public companies—the United States, the United Kingdom, and Japan—hostile takeovers emerged under a common set of circumstances. Yet the national regulatory responses to these new market developments diverged substantially. In the United States, the Delaware judiciary became the principal source and enforcer of rules on hostile takeovers. These rules give substantial discretion to target company boards in responding to unsolicited bids. In the United Kingdom, by contrast, a private body consisting of market professionals was formed to adopt and enforce the rules on hostile bids and defenses. In contrast to those of the United States, the U.K. rules give the shareholders primary decisionmaking authority in responding to hostile takeover attempts. The hostile takeover regime in Japan, which developed recently and is still evolving, combines substantive rules with elements drawn from both the United States (Delaware) and the United Kingdom, while adding distinctive elements, including an independent enforcement role for Japan’s stock exchange.

This Article provides an analytical framework for business law development to explain the diversity in hostile takeover regimes in these three countries. The framework identifies a range of supply and demand dynamics that drives the evolution of business law in response to new market developments. It emphasizes the common role of subordinate lawmakers in filling the vacuum left by legislative inaction, and it highlights the prevalence of “preemptive lawmaking” to avoid legislation that may be contrary to the interests of important corporate governance players.

Extrapolating from the analysis of developed economies, the framework also illuminates the current stateand plausible future trajectory of hostile takeover regulation in the important emerging markets of China, India, and Brazil. A noteworthy pattern that the analysis reveals is the ostensible adoption—and adaptation—of “best practices” for hostile takeover regulation derived from Delaware and the United Kingdom in ways that protect important interests within each emerging market’s national corporate governance system.